This conservative investing stock has risen sharply

When we’re picking stocks to recommend in our newsletters, including Wall Street Stock Forecaster, our publication for conservative investing in U.S. stocks, we like to see companies that benefit from steady revenue streams from high-quality assets, long-term contracts or other reliable sources.

That’s because this type of revenue helps cut a stock’s risk. It also cuts its exposure to the ups and downs of the economic cycle.

Conservative investing: Shift toward services has helped this former “Stock of the Year”

International Business Machines Corp. (symbol IBM on New York) provides an example of such a company. We recently updated our buy/sell/hold advice on this conservative investing stock in a Wall Street Stock Forecaster Hotline. (Note: If you are a current Wall Street Stock Forecaster subscriber or Inner Circle member please click here to view Pat’s recommendation. Be sure to log in first.)

(IBM has gained 28.3% since we named it our Wall Street Stock Forecaster “Stock of the Year” for 2010. Tomorrow, January 28, 2011, we’ll name a brand new Stock of the Year for 2011 in our Wall Street Stock Forecaster Hotline. Read on to learn how you can get this high-powered pick — and one month of Wall Street Stock Forecaster — free.)

At first glance, you may not think of IBM as a company that benefits from long-term contracts. After all, it’s best known as a conservative investing stock that makes large, mainframe computers, as well as home computers, printers and other hardware.

However, in the past few years IBM has steadily moved away from these products and toward designing computer systems and managing them on behalf of clients, mainly under long-term contracts. These activities generate higher profit margins, and help businesses cut costs and improve productivity. As a result of this shift, the company now gets 55% of its revenue and 40% of its earnings from computer services.

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Software expansion a plus for IBM—but acquisition strategy carries risks

IBM continues to expand its software and computer services businesses, mostly through acquisitions. For example, in late 2010, IBM paid $480 million for Unica Corp. This company’s software analyzes customer buying preferences. That helps its clients design better advertising campaigns.

Expanding by acquisition has risks. That’s because the buyer of something rarely knows as much about it as the seller. So it follows that if a company makes enough acquisitions, it might eventually buy something that has hidden problems.

IBM aims to lower its acquisition risk by limiting its purchases to smaller companies, like Unica, that complement its existing products and services.

Well-established U.S. stocks are among the best cross-border deals

With the Canadian dollar now just above parity with the U.S. dollar, there’s never been a better time to add well-established U.S. stocks to your portfolio. If you follow a conservative investing strategy, you could choose from the 51 companies we recommend in Wall Street Stock Forecaster’s Conservative Growth Portfolio.

We continue to recommend that you maintain a reasonable portion of your portfolio in well-established U.S. stocks. That’s because, as IBM demonstrates, the U.S. market features major multinational opportunities that simply aren’t available anywhere else. Moreover, many U.S. firms are unique world leaders.

Of course, no one can consistently predict foreign-exchange rates, and no one knows how long the Canadian dollar will remain at its current high level. But if you’re thinking of adding more U.S. stocks to your portfolio, now is a great time to get started.

As I mentioned, we’ll unveil a brand-new “Stock of the Year” for 2011 in tomorrow’s Wall Street Stock Forecaster Hotline. You can be among the first to get this pick, plus one free month of Wall Street Stock Forecaster, when you subscribe today. Click here to learn how.


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